Physician Retirement Planning: Hitting the Contribution Limits Before December 31st

Retirement planning can sound daunting, especially for physicians balancing the demands of a challenging profession with personal financial needs. A crucial aspect of this planning involves maxing out retirement plan contributions before year-end. This article sheds light on why hitting the contribution limit is essential, the various retirement plans and their respective limits, the merits of front-loading contributions, the tax advantages associated with maximum contributions, and the concept of catch-up contributions.

Why You Should Strive to Hit Your Contribution Limit

Achieving the maximum contribution limit in your retirement account like a 401(k), Roth IRA, or traditional IRA not only expands your retirement savings but can also provide significant tax benefits.

Moreover, hitting your contribution limit can play a substantial role in advancing your financial wellness. You don’t need to retire early, and with AMA insurance, health insurance, and medicare advantage programs, you can continue contributing even after the traditional retirement age. Consider it like this: the more you add to your retirement pot now, the more comfortable your physician retirement will be.

Contribution Limits for Physician Retirement Plans

The IRS sets limits each year on how much you can contribute tax-free to different retirement accounts. Being aware of these limits helps ensure you are maximizing your savings opportunities. Here are the contribution limits for 2023:

401(k)

The contribution limit for 401(k)s is $22,500 in 2023, up from $20,500 in 2022. This applies to all employee salary deferral contributions. Your total contributions, including employer match, cannot exceed $66,000 ($73,500 if 50 or older).

Traditional IRA

You can contribute up to $6,500 to a Traditional IRA in 2023 if under the age of 50. This limit rises to $7,500 once you turn 50 or older. Contributions may be tax deductible depending on your income.

Roth IRA

The contribution limits for Roth IRAs are the same as Traditional IRAs—$6,500 if under 50 and $7,500 if 50 or older. Contributions are made after-tax but withdrawals in retirement are tax-free.

SEP-IRA

SEPs allow contributions up to 25% of compensation or $66,000 for 2023, whichever is less. This limit applies per participant, so business owners can contribute significantly.

Simple IRA

Simple IRA contribution limits are $15,500 in 2023, plus $3,500 catch-up contributions if 50 or older. Employers must also match employee contributions up to 3% of compensation.

403(b)

403(b) contribution limits are the same as 401(k)s – $22,500 for employee salary deferrals in 2023 plus $66,000 total, including employer contributions.

Defined Benefit Pension Plans

Benefits under defined benefit pension plans are determined by a set formula, not by contributions. But annual contributions are limited to the full funding target amount.

Understanding contribution limits is essential for planning for your financial future, but it’s not the only element. Check out our blog for a few essential financial planning tips that can start you down the right path.

Learn About Financial Planning

Front-Loading Contributions

Front-loading means contributing as much as you can at the start of the year. This may not be a viable option for everyone as it requires a substantial lump sum of money. However, front-loading contributions allows you to capitalize on the growth of the market as soon as possible.

Remember, the goal is to secure your future and to ensure that when retirement plans become a reality, you’re financially ready. Considering factors like AMA insurance, medicare advantage, disability insurance, the center stage of your career—whether you currently focus on total joint replacements or cardiac care—is just a stepping stone into the next phase.

Benefits of Front Loading

More years for tax-deferred growth and compounding
Reaching your physician retirement goals sooner
Potentially allow you to contribute less later when expenses may be higher
Take advantage of company match programs while they exist
Achieve peace of mind knowing your savings is on track

Tax Advantages of Maximum Contributions

Making the maximum allowable contributions to retirement accounts like 401(k)s and IRAs can provide significant tax advantages for physicians. By contributing pre-tax or tax-deductible dollars to these accounts, physicians can lower their taxable income and save money on taxes in the current year.

For example, contributing $20,500 to a 401(k) as a married physician filing jointly could potentially drop your taxable income from the 32% bracket down to the 24% bracket, saving thousands in taxes. Maxing out an IRA contribution at $6,000 could provide similar tax savings.
The tax benefits extend beyond just income taxes too. Growth inside these retirement accounts is tax-deferred, meaning you don’t pay taxes on dividends, interest, or capital gains each year. Taxes are only owed when withdrawals begin in physician retirement. This enables faster growth compared to taxable investment accounts.

Tips for Maximizing Contributions

Prioritize tax-advantaged accounts over taxable accounts
Consider making both pre-tax and Roth contributions to hedge your bets on future tax rates
Take advantage of employer matching contributions whenever available
Use catch-up contributions if age 50 or over to stuff even more into accounts
Work with a financial advisor to optimize your specific situation

Two people meeting with financial advisor

Catch-Up Contributions

Another critical aspect of financial planning for physician retirement is the concept of catch-up contributions. For those nearing their traditional retirement age, the IRS allows additional contributions to retirement accounts beyond regular contribution limits. This measure encourages late-starters or those anticipating a lifestyle upgrade in retirement to ramp up their savings in the upcoming years before they retire.

Benefits of Catch-Up Contributions

Make up for lost time if retirement savings lagged earlier in your career
Take advantage of peak earning years and aggressively save
Provide larger tax deduction to reduce current year tax bill
Enable investments to keep growing tax-deferred longer
Build a larger nest egg to cover increased costs and longevity in retirement
Flexibility to frontload retirement accounts while still working

Partner With Physician’s Resource Services to Plan for Your Financial Future

Planning for your physician retirement may seem overwhelming, but with the right partner, it doesn’t have to be. Physician’s Resource Services leverages years of experience in the financial and healthcare industry to help physicians navigate the complexities of taxes, retirement planning, and other elements of their financial future. Our goal is to give you the support you need to make the right decisions regarding your financial health.

Reach out to our team today, and let us start you on the path to financial success.

This material is provided as a courtesy and for educational purposes only.

All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC.

Advisory Services Network, LLC does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state laws are complex and constantly changing. You should always consult your own legal or tax professional for information concerning your individual situation.

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